The Federal Reserve is likely to start cutting interest rates by the year’s end, but the central bank is unlikely to reach its 2 percent inflation target without a “real recession,” Citadel CEO and founder Ken Griffin said.
While speaking at the 27th annual Milken Institute Global Conference on May 6 in a wide-ranging interview, Mr. Griffin said he anticipates that the Fed’s cutting cycle will begin at the December policy meeting of the Federal Open Market Committee (FOMC). However, the Wall Street billionaire also said that it is unclear whether inflation will “actually decelerate enough by then,” pointing to the persistence of services inflation.
In March, the annual services inflation rate shot up to 5.3 percent, up from 5 percent in February.
During a separate CNBC interview, Mr. Griffin conceded that it is unlikely that inflation will return to the 2 percent target desired by the U.S. central bank. The only way that the Fed can achieve this objective is if the United States is “in a real recession.”
In the meantime, there is “a small chance” of one more rate hike later this year. In addition, Mr. Griffin asserted that it would be hard for Fed Chair Jerome Powell to cut interest rates amid continued fiscal stimulus.
“He’s showing up in a fight with both of his hands tied behind his back because D.C. is just on a different agenda than he is,” Mr. Griffin said. “He’s trying to prudently slow the economy, bring inflation back down, and really engineer the whole soft landing.”
Although economic conditions might be slowing, a downturn may not be on the horizon, according to various outlooks and models.
The Federal Reserve Bank of Atlanta’s GDPNow model estimate suggests that the second-quarter GDP growth rate will be 3.3 percent. The New York Fed Staff Nowcast suggests the economy will grow 2.2 percent in the April–June period.
As for growing fears of repeating the 1970s’ stagflation environment—a mix of high inflation, rising unemployment, and stagnating growth—the central bank head dismissed these concerns.
“I don’t see the stag, or the ’flation,” Mr. Powell said.
So, more than two years since the Fed started its tightening cycle, how is the U.S. economy still staying afloat?
Torsten Slok, chief economist at Apollo, said there are two reasons: lower interest-rate sensitivity and strong demand tailwinds.
Path of Interest Rates
According to the CME FedWatch Tool, the futures market anticipates two quarter-point rate cuts beginning in September.The Fed chief reassured financial markets at the post-FOMC meeting press conference last week that it is “unlikely” the next policy move will be a rate increase. Mr. Powell told reporters that inflation will likely come down and warrant a reduction to the benchmark federal funds rate.
Appearing at the Milken Institute event on May 7, Minneapolis Fed President Neel Kashkari took a different stance, explaining that a rate hike is unlikely but is not off the table.
Ultimately, the latest inflation data have forced the Fed to question whether monetary policy is restrictive enough, Mr. Kashkari said.
Although the most likely scenario is that rates will stay higher for longer, it is worthwhile to consider other possibilities, he said.
“If inflation starts to tick back down or we saw some marked weakening in the labor market, then that might cause us to cut back on interest rates,” the regional central bank chief said. “Or if we get convinced eventually that inflation is embedded or entrenched now at 3 percent and that we need to go higher, we would do that if we needed to.”
In an essay titled “Policy Has Tightened a Lot. How Tight Is It?” Mr. Kashkari could not explain robust economic activity amid restrictive policy.
Ken Mahoney, CEO and president of Mahoney Asset Management, said it is possible that the monetary authorities will make “the wrong decision at the wrong time.”
“We do expect some sort of Fed ‘whiffing’ as usual and making the wrong decision at the wrong time,” he said in a note, adding that the central bank will maintain the “if it ain’t broke, don’t fix it” approach to policy.
But even if the central bank pulls the trigger on a widely anticipated rate decrease of 25 basis points, will it be enough to fight inflation?
“We must note that there is only so much they can do to fight inflation with the blunt toolkit,” he said. “A difference of 0.25 basis points may not make a huge difference if we have fiscal policy out of control and the folks on Capitol Hill spending like drunken sailors. When we have $1 trillion bills being passed here and they’re like it’s nothing, and the Fed is a little bit stuck holding rates steady.”
The Cleveland Fed’s Inflation Nowcasting model suggests the annual inflation rate will be unchanged at 3.5 percent this month and then tick up to 3.6 percent in May.
In order to restore the Fed’s price stability goal, there will need to be “a meaningful slowdown in the labor market and the housing market,” Mr. Slok said.
“In short, GDP and earnings should remain strong for the rest of 2024,” he said.
